Question 1

Figure 10.1 -Refer to Figure 10.1..If the level of real GDP is initially Y₂,firms will ________ production until equilibrium is reached at ________. A) increase; Y₂ B) decrease; Y₂ C) increase; Y₁ D) decrease; Y₁

Accepted Answer

In the diagram, at Y₂, there is an excess supply of goods and services which indicates that firms have produced more than what households are willing to buy. This will cause a decline in production and employment. Thus, firms will decrease production until equilibrium is reached at Y₁ where there is no excess supply or demand.

Question 2

Figure 10.2 -Refer to Figure 10.2..Assume the economy is initially at equilibrium at potential GDP of $250 billion.If the MPC = 0.50 and the difference between AE₁ and AE₂ represents a $75 billion decrease in planned investment spending,real GDP at Y₂ will be equal to A) $100 billion. B) $125 billion. C) $175 billion. D) $212.5 billion.

Accepted Answer

A

Question 3

Other things equal,if planned investment spending is greater than actual investment spending,then aggregate expenditure will be ________ real GDP and inventories will ________.
A) greater than; rise
B) greater than; fall
C) less than; rise
D) less than; fall

Accepted Answer

When planned investment spending is greater than actual investment spending, it means that businesses are investing less than they intended, leading to a situation where aggregate expenditure exceeds real GDP. As a result, inventories will fall because businesses are selling more than they are producing.

Question 4

If the MPC = 0.80,the tax multiplier is
A) -2.
B) -4.
C) -5.
D) -8.

Accepted Answer

The tax multiplier is equal to -MPC/(1-MPC), so if MPC = 0.80, then the tax multiplier is equal to -0.80/(1-0.80) = -4.

Question 5

Equilibrium in the goods market occurs where
A) real GDP equals nominal GDP.
B) aggregate expenditure equals autonomous consumption.
C) autonomous consumption equals induced consumption.
D) aggregate expenditure equals real GDP.

Accepted Answer

Equilibrium in the goods market occurs where aggregate expenditure equals real GDP. This is where planned aggregate expenditure (which includes both autonomous consumption and induced consumption) equals the actual level of output in the economy, which is measured by real GDP. Therefore, choice D is the correct answer.

Question 6

Table 10.1 $$\begin{array} { | l | l | } \hline \text { Consurmpticn } & C = \$ 1.0 + 0.75 \mathrm { YD } \ \hline \text { Irvestmernt } & = \$ 1.9 \ \hline \text { Goverument purchases } & = \$ 2 \ \hline \text { Net exports } & = - \$ 0.5 \ \hline \text { Taxes } & = \$ 0 \ \hline \text { Goverument trarssfer } & \ \text { gayments } & = \$ 0 \end{array}$$ (all values are in billions of dollars) -Refer to Table 10.1.The value of the government purchases multiplier in this economy is A) 0.2. B) 0.8. C) 5. D) 4.

Accepted Answer

The answer of Table 10.1
 \[\begin{array} { | l |...

Question 7

Which of the following best represents the consumption function?
A) consumption = autonomous consumption + (the marginal propensity to consume × disposable income)
B) consumption = disposable income - (autonomous consumption / the marginal propensity to consume)
C) consumption = disposable income × (1 / 1 - the marginal propensity to consume)
D) consumption = autonomous consumption + (the marginal propensity to consume × transfer payments) / disposable income

Accepted Answer

The consumption function represents the relationship between disposable income and consumption. It states that consumption is equal to the sum of autonomous consumption and the product of the marginal propensity to consume (the fraction of each additional dollar of disposable income that is spent) and disposable income. This is represented in choice A, where consumption equals autonomous consumption plus the marginal propensity to consume times disposable income.

Question 8

Figure 10.2 -Refer to Figure 10.2.Assume the economy is initially at equilibrium at potential GDP of $500 billion.If the MPC = 0.80 ,and real GDP falls to Y₂ = $400 billion,the vertical distance between AE₁ and AE₂ must be A) $8 billion. B) $20 billion. C) $80 billion. D) $100 billion.

Accepted Answer

The vertical distance between AE₁ and AE₂ represents the change in aggregate expenditures (AE) due to the change in real GDP. According to the consumption function equation, the change in consumption (C) is equal to the MPC times the change in income (Y). Therefore, the change in AE is equal to the change in consumption (0.8 × (500-400) = $80 billion) plus any other changes in investment, government spending, and net exports. Since we are not given any information about those components, we can assume they remain constant, resulting in a vertical distance of $80 billion on the AE curve. However, since the question asks for the absolute value of the vertical distance, the answer is $20 billion (not $80 billion as in choice C).

Question 9

If the MPC = 0.75,a decrease in government spending from $875 billion to $840 billion will decrease real GDP by
A) $26.25 billion.
B) $35 billion.
C) $46.67 billion.
D) $140 billion.

Accepted Answer

The spending multiplier is 1/(1-MPC) = 1/(1-0.75) = 4. The change in government spending is $875 billion - $840 billion = $35 billion. The decrease in real GDP is 4 * $35 billion = $140 billion.

Question 10

Figure 10.2 -Refer to Figure 10.2.f in this economy the MPC = 0.6,Y₂ = $50 billion,and AE₂ is $5 billion below AE₁,potential GDP is A) $53 billion. B) $55 billion. C) $58.3 billion. D) $62.5 billion.

Accepted Answer

The multiplier is 1/(1-MPC) = 1/0.4 = 2.5. The decrease in AE is $5 billion, so the decrease in GDP is 2.5 * $5 billion = $12.5 billion. Therefore, potential GDP is Y₂ + $12.5 billion = $50 billion + $12.5 billion = $62.5 billion.

Question 11

Figure 10.1 -Refer to Figure 10.1..If the level of real GDP is initially Y₃,spending is ________ production and there is an unexpected ________ in inventories. A) greater than; increase B) greater than; decrease C) less than; increase D) less than; decrease

Accepted Answer

The answer of Figure 10.1 -Refer to Figure 10.1..If the...

Question 12

Figure 10.1 -Refer to Figure 10.1..If the level of real GDP is initially Y₃,firms will ________ production until equilibrium is reached at ________. A) increase; Y₃ B) decrease; Y₃ C) increase; Y₁ D) decrease; Y₁

Accepted Answer

In the diagram, at Y₂, there is an excess supply of goods and services which indicates that firms have produced more than what households are willing to buy. This will cause a decline in production and employment. Thus, firms will decrease production until equilibrium is reached at Y₁ where there is no excess supply or demand.

Question 13

Table 10.1 $$\begin{array} { | l | l | } \hline \text { Consurmpticn } & C = \$ 1.0 + 0.75 \mathrm { YD } \ \hline \text { Irvestmernt } & = \$ 1.9 \ \hline \text { Goverument purchases } & = \$ 2 \ \hline \text { Net exports } & = - \$ 0.5 \ \hline \text { Taxes } & = \$ 0 \ \hline \text { Goverument trarssfer } & \ \text { gayments } & = \$ 0 \end{array}$$ (all values are in billions of dollars) -Refer to Table 10.1.Equilibrium real GDP for this economy is equal to A) $5.75 billion. B) $12 billion. C) $17.6 billion. D) $46 billion.

Accepted Answer

Equilibrium real GDP is given by the formula:
Y = C + I + G + NX
where C is consumption, I is investment, G is government purchases, and NX is net exports. 
Substituting the values from the table:
Y = (1.0 + 0.75YD) + 1.9 + 2 - 0.5
Solving for Y:
Y = 17.6
Therefore, the equilibrium real GDP for this economy is $17.6 billion.

Question 14

If the MPC = 0.75,a decrease in personal taxes from $100 billion to $80 billion will increase real GDP by
A) $20 billion.
B) $40 billion.
C) $60 billion.
D) $80 billion.

Accepted Answer

The change in taxes is $20 billion. With an MPC of 0.75, the initial increase in consumption is $15 billion ($20 billion * 0.75). The multiplier is 1/(1-MPC) = 4. Therefore, the total increase in GDP is $15 billion * 4 = $60 billion.

Question 15

Table 10.1 $$\begin{array} { | l | l | } \hline \text { Consurmpticn } & C = \$ 1.0 + 0.75 \mathrm { YD } \ \hline \text { Irvestmernt } & = \$ 1.9 \ \hline \text { Goverument purchases } & = \$ 2 \ \hline \text { Net exports } & = - \$ 0.5 \ \hline \text { Taxes } & = \$ 0 \ \hline \text { Goverument trarssfer } & \ \text { gayments } & = \$ 0 \end{array}$$ (all values are in billions of dollars) -Refer to Table 10.1.The value of the tax multiplier in this economy is A) 0. B) -2. C) -3. D) -5.

Accepted Answer

The tax multiplier formula is - MPC/ (1-MPC) where MPC is the marginal propensity to consume. From the consumption function given in the table, MPC is 0.75. Therefore, the tax multiplier is -0.75/(1-0.75) = -3.

Question 16

Figure 10.1 -Refer to Figure 10.1..If the level of real GDP is initially Y₂,spending is ________ production and there is an unexpected ________ in inventories. A) greater than; increase B) greater than; decrease C) less than; increase D) less than; decrease

Accepted Answer

If real GDP is initially at Y₂ and spending is less than production, it results in an increase in inventories because goods are being produced but not sold.

Question 17

If the MPC = 0.80,the government purchases multiplier is
A) 2.
B) 4.
C) 5.
D) 8.

Accepted Answer

The government purchases multiplier is calculated as 1/(1-MPC). With an MPC of 0.80, the multiplier is 1/(1-0.80) = 1/0.20 = 5.

Question 18

Table 10.1 $$\begin{array} { | l | l | } \hline \text { Consurmpticn } & C = \$ 1.0 + 0.75 \mathrm { YD } \ \hline \text { Irvestmernt } & = \$ 1.9 \ \hline \text { Goverument purchases } & = \$ 2 \ \hline \text { Net exports } & = - \$ 0.5 \ \hline \text { Taxes } & = \$ 0 \ \hline \text { Goverument trarssfer } & \ \text { gayments } & = \$ 0 \end{array}$$ (all values are in billions of dollars) -Refer to Table 10.1.Suppose that all of the information given in the table remains the same except that taxes equal $0.5 billion.Equilibrium real GDP for this economy is equal to A) $6.25 billion. B) $17.7 billion. C) $16.1 billion. D) $47.3 billion.

Accepted Answer

To find the equilibrium level of real GDP, we need to use the formula:

Y = C + I + G + NX

where 
Y = real GDP 
C = consumption 
I = investment 
G = government purchases 
NX = net exports

Substituting the given values:

Y = (1 + 0.75YD) + 1.9 + 2 - 0.5 + 0.5 
Y = 5.4 + 0.75YD

We know that YD = Y - T, where T is taxes. 
So, with T = 0.5:

YD = Y - T 
YD = Y - 0.5

Substituting this into the previous equation:

Y = 5.4 + 0.75(Y - 0.5) 
Y = 8.1 + 0.75Y 
0.25Y = 8.1 
Y = 32.4

Therefore, the equilibrium level of real GDP is $16.1 billion.

Question 19

If the MPC = 0.8,an increase in investment spending from $35 billion to $38 billion will increase real GDP by
A) $3 billion.
B) $3.75 billion.
C) $15 billion.
D) $24 billion.

Accepted Answer

The answer of If the MPC = 0.8,an increase in...

Question 20

Other things equal,if planned investment spending is less than actual investment spending,then aggregate expenditure will be ________ real GDP and employment will ________.
A) greater than; increase
B) greater than; decrease
C) less than; increase
D) less than; decrease

Accepted Answer

Planned investment spending refers to the projected or intended investment spending, while actual investment spending is the realized or actual investment spending. If actual investment spending is greater than planned investment spending, aggregate expenditure will be greater than the planned level, leading to an increase in real GDP and employment. However, if planned investment spending is less than actual investment spending, aggregate expenditure will be less than the actual level, leading to a decrease in real GDP and employment. Therefore, option D is the correct answer.

Quiz 10: Explaining Aggregate Demand: the Is-Mp Model

Figure 10.1 -Refer to Figure 10.1..If the level of real GDP is initially Y₂,firms will production until equilibrium is reached at .

Figure 10.2 -Refer to Figure 10.2..Assume the economy is initially at equilibrium at potential GDP of $250 billion.If the MPC = 0.50 and the difference between AE₁ and AE₂ represents a $75 billion decrease in planned investment spending,real GDP at Y₂ will be equal to

Other things equal,if planned investment spending is greater than actual investment spending,then aggregate expenditure will be real GDP and inventories will .

If the MPC = 0.80,the tax multiplier is

Equilibrium in the goods market occurs where

Which of the following best represents the consumption function?

Figure 10.2 -Refer to Figure 10.2.Assume the economy is initially at equilibrium at potential GDP of $500 billion.If the MPC = 0.80 ,and real GDP falls to Y₂ = $400 billion,the vertical distance between AE₁ and AE₂ must be

If the MPC = 0.75,a decrease in government spending from $875 billion to $840 billion will decrease real GDP by

Figure 10.2 -Refer to Figure 10.2.f in this economy the MPC = 0.6,Y₂ = $50 billion,and AE₂ is $5 billion below AE₁,potential GDP is

Figure 10.1 -Refer to Figure 10.1..If the level of real GDP is initially Y₃,spending is production and there is an unexpected in inventories.

Figure 10.1 -Refer to Figure 10.1..If the level of real GDP is initially Y₃,firms will production until equilibrium is reached at .

If the MPC = 0.75,a decrease in personal taxes from $100 billion to $80 billion will increase real GDP by

Figure 10.1 -Refer to Figure 10.1..If the level of real GDP is initially Y₂,spending is production and there is an unexpected in inventories.

If the MPC = 0.80,the government purchases multiplier is

If the MPC = 0.8,an increase in investment spending from $35 billion to $38 billion will increase real GDP by

Other things equal,if planned investment spending is less than actual investment spending,then aggregate expenditure will be real GDP and employment will .